The power to compete ... or to tax

Published December 14. 2012 12:01AM

Electric power suppliers will be a tempting target for a governor and state legislature searching for additional sources of revenue as they confront closing not only a sizeable budget deficit this fiscal year, but projected shortfalls of roughly $2 billion in the two fiscal years to follow.

Increasing domestic natural gas supplies, which result largely from the fracking process that provides access to previously untapped sources of gas, has placed downward pressure on electric rates. Wholesale prices are at the lowest level in a decade. A year ago Connecticut regulators approved a cost decrease for electricity provided by Connecticut Light & Power, reducing rates by 7.5 percent.

CL&P is the default supplier for consumers who don't choose an alternative supplier in the deregulated market. Competition is growing, however, as reduced power generation costs allow more providers to compete with the CL&P default rate. This is particularly true in the industrial sector, where about 90 percent of these large-use customers are striking deals to lower their electric costs, said Dan Dolan, president of the New England Power Generators Association (NEPGA).

With costs dropping, lawmakers and the Malloy administration may be tempted to impose or extend taxes on the power generation industry, seeing it as a relatively painless way politically to help close the budget gap. The problem with that strategy, however, is that the same market forces that are lowering electric costs in Connecticut are also at work in adjoining states. High electric costs have long placed the state at a competitive disadvantage. If elected leaders see the recent decrease in those rates as an opportunity to raise more revenues, rather than a chance to improve the state's competitive standing, they may well send the message that Connecticut is not open for business after all.

When faced with closing the $3.5 billion projected budget shortfall he inherited upon arriving in office in 2011, Gov. Dannel P. Malloy proposed, and the legislature adopted, a first in the nation tax on power generation. Under that law the state assesses power plants a one-quarter of a cent tax for every kilowatt hour they produce. The state estimated this tax would generate $72 million over the two-year budget cycle, while NEPGA said it expects Connecticut power generators will end up paying $50 million to $70 million.

The tax was back in the news this week when Gov. Malloy, seeking to close the current budget deficit, proposed adjusting the tax to raise another $10 million through the end of the fiscal year that ends June 30. It seems that some power generators did what businesses often do when confronted with a new tax - they tried to find ways to get around it, assigning generation and energy marketing functions to separate affiliates. Now the governor wants the legislature to fix this "loophole."

Interestingly, the power generation tax was originally approved as a temporary tax to help address a fiscal crisis tax. It is supposed to "sunset," or end, at the end of the fiscal year. The fact that the administration is trying to tweak the law to find more revenue, however, seems to indicate it will not want the sun to go down on this tax.

Simply keeping the tax in place might be the best power generators can hope for. During the last budget debate the Energy Committee considered legislation that would have raised even more revenue from the industry, including a plan that would have really put the screws to Millstone Power Station and its owner, Dominion utilities. At one point the committee floated a plan to raise $340 million a year from generators, with $332 million of it coming from Millstone, prompting Dominion to warn it might shut down Millstone's nuclear reactors if that became law.

Given Connecticut's persistent fiscal problems, expect more such proposals to surface. While we assume the current power generation tax will persist - the legislature will be in no mood to give up revenues - it would be a mistake to heap more taxes on the power industry and send the message that raising revenues, not being competitive, is the state's primary goal.